Government plea in Ambani gas war may be misleading

Was the government of India speaking the whole truth when it moved a special leave petition (SLP) in the Supreme Court on Saturday to annul the gas supply deal between warring brothers Mukesh and Anil Ambani?

The Bombay high court upheld the deal between the two brothers as valid in June, forcing the hand of the Union government. Counsel for Anil Ambani have alleged that the SLP was intended to favour Mukesh Ambani by blocking the gas deal.

Among other things, the petition seems to imply that the government knew little about the gas deal entered into by the two brothers when the Reliance empire was carved up in 2005. It also seems to suggest that oil and gas exploration contractors under the New Exploration Licensing Policy (NELP) cannot price their products as they deemed fit.
The first claim in the petition is that it did not know that its contractor Reliance Industries Ltd (RIL) had promised a substantial amount of gas to prospective customers without its permission. According to this argument, contractors are not allowed to enter into supply contracts without first getting the recipient, the quantity and the prices approved by the government.  

In keeping with this, the government has drawn up a list of eligible customers for RIL’s Krishna-Godavari (KG) gas along with the quantity of gas each of them ‘deserves’ and the price they will pay for it.

The government says it later discovered that its contractor (RIL) had entered into contracts outside this framework. It also adds that it learnt of the gas deal between RIL and Anil group only when the high court alluded to it in its judgment last month. This is why it did not object to the deal earlier.

This argument is dubious on two counts. First, RIL signed a letter of intent to sell gas to the state-owned National Thermal Power Corporation (NTPC) way back in 2004 on the basis of global bids. It did not seek any approval from the government about the customer, the price or the quantity, nor did the government oppose the deal.

The second point on which the government’s argument fails goes back to 2006, when the government had given a no-objection certificate to the RIL demerger agreement. The agreement clearly spelt out that around 28 million cubic metres (35% of RIL’s production) would be sold to the Anil group at the same prices as that given to NTPC.

Another defective argument the centre has used is that under NELP, contractors do not have the freedom to choose their customers or the prices. Therefore, RIL cannot sell gas at $2.34 per million British thermal units (about 1,000 cubic feet), since that price was “not approved” by the government.

This argument too fails to hold water in the light of government’s own documents. For example, the petroleum ministry’s website says “Government have also offered blocks under New Exploration Licensing Policy (NELP) to private and public sector companies with the right to market gas at market-determined prices.

The NELP notification in the Gazette of India dated February 25, 1999, says the government has framed the policy to “attract private investment in the oil and gas sector… in keeping with the liberalised policy of the government..”

The fourth highlight of the new policy, according to the Gazette, would be “freedom to the contractors for marketing of crude oil and gas in the domestic market.”

Indeed, the government’s change of stance on the issue of marketing freedom has seen many companies who invested under NELP to come out with dire warnings.

“Were the government to consider the reintroduction of some form of administered pricing for natural gas, we would be concerned since, as a long term investor in India, of primary importance to us is fiscal stability for the life of our contract,” Ashok K Jhawar, former country head of BP, which had won blocks for the extraction of gas from coal seams (CBM), wrote to petroleum minister Murli Deora when the proposal was mooted in 2007.

Reliance’s own partner in the KG basin, Canadian firm Niko Resources, too said government determination of gas prices was a violation of its obligation under the policy.
“We consider such influence being made on gas pricing to be non-compliant with the rights provided to the contractor for marketing of gas at ‘arm’s-length prices to the benefit of parties to the contract (Reliance and government)’ under the Production Sharing Contract,” Niko chairman Edward S Sampson wrote to then petroleum secretary MS Srinivasan, when the government began moves to ‘determine’ a gas price in 2007.